Cheaper Smartphones, Faster DRAM Chips [ANALYSIS] by Veibha Subramaniam, Capital Cube

The DRAM Market: Executive Summary

  • Smartphone upgrades from feature phones in emerging markets is the next leg of growth for the smartphone industry
  • Cheaper smartphone makers like Xiaomi and Micromax are replacing Samsung as the leading brand in both China and India in 1Q2014
  • MediaTek’s earning’s growth was twice that of Qualcomm in 2013 indicating better revenue for MediaTek given the larger market expansion for cheaper smartphones
  • This market expansion defines the market for mobile DRAM market
  • Samsung, Micron and SK Hynix control almost 90% of the DRAM market. DRAM prices are expected to be stable. These 3 companies will increase earnings in this space having already announced mass manufacture of new generation DRAM chips (DDR4)
  • Nanya technologies will also benefit from this wave given its holding in Inotera memories. Inotera announced that it will manufacture DDR4 chips by this year end
  • A combination of new technology DRAM chips (DDR4) and increase in cheaper smartphone penetration will increase the marketsize of the DRAM chips

Cheaper smartphones

Xiaomi, Micromax, Karbonn phones – the cheaper smartphones made in China and India are now the real threat to Samsung Electronics Co. Ltd. (LON:BC94) (KRX:0059935) and Apple Inc. (NASDAQ:AAPL) smartphones. In July 2014, Micromax ousted Samsung as the leading brand in all types of smartphones in the second quarter by grabbing 16.6% of the market share. Samsung had 14.4% of the marketshare, down from 16.3%.

Cheaper Smartphone DRAM

(Source: Counterpoint research, Canalys)

In the same quarter, Xiaomi usurped the top spot from Samsung in China. Xiaomi became No. 1 in China by shipping 15 million devices in the second quarter, giving it a 14% share of the market.  Samsung shipped 13.2 million smartphones giving it a 12% market share.

Cheaper Smartphone DRAM

Cheaper Smartphone DRAM

The next leg of growth in the smartphone industry will come from the emerging countries. In 2013, The Indian smartphone market grew by close to 55%, but that represents just 10% penetration. According to Mary Meeker’s Internet trends report 2014, Meeker expects the Indian smartphone growth rate to decline but the size to increase by 45%. This is mainly because of people upgrading their phones from feature phones to smartphones.

According to TrendForce, in 1Q2014, Samsung managed to claim first place with a worldwide market share of over 30%, due to its low to mid range smartphone shipments.

A recent Economist study indicated a huge growth in the under-$200 price range smartphone. This is the category that smartphone makers like Xiaomi and Micromax operate in.

Qualcomm (QCOM) vs MediaTek (2454)

Micromax is able to produce a low cost smarphone using low cost SoC (system on chip) manufactured by MediaTek Inc. (TPE:2454) and low cost DRAM chips.

Xiaomi on the other hand uses QUALCOMM, Inc. (NASDAQ:QCOM)’s Snapdragon microprocessor for its phones. It makes money by selling apps and providing cloud based services through its phone.

Cheaper Smartphone DRAM

MediaTek trades at 22X earnings whereas Qualcomm trades at 18X earnings. This is mainly a reflection of the free cash flow that MediaTek generates compared to Qualcomm.

Comparing profitability between MediaTek and Qualcomm, it can be seen that Net Margin for Qualcomm is around 27% whereas that for MediaTek is around 21%.

The surge in cheaper smartphones has resulted in a higher earning and revenue growth percentage for MediaTek vs Qualcomm. Media Tek’s earnings growth was twice that of Qualcomm’s in 2013.

MediaTek’s operating cash flow growth has had a meteoric rise indicating the explosion of cheaper smartphones in China and India.

Mobile DRAM market

A DRAM enables electronic devices to access any part of the system memory directly and instantly, rather than by accessing the data in a sequential manner. DRAMs used in mobile devices such as smartphones, tablets, portable gaming devices, and PDAs are referred to as mobile DRAMs. Currently, the increasing adoption of mobile devices worldwide is fostering the demand for DRAMs.

Cheaper Smartphone DRAM

(Source: Micron)

DDR3 is the DRAM which is currently in wide use in smartphones. Given the increase in mobile devices like smartphones and tablets, DRAM manufacturers have decreased the production of PC DRAMS and have shifted to mobile DRAMS.

Samsung, Micron and SK Hynix have already announced commercial production of the DDR4 memory chip using the 20nm process. This DRAM chip will be used in the next generation iPhone and Samsung android phone. The main ramp up in production of the chip by SK Hynix and Samsung is to be ready for demand from Intel’s launch of next-generation high-end desktop and server platforms. These use Intel’s next generation Xeon processor and rely on the new-gen memory technology.

The market size of the DRAM market will increase by 12%YoY to USD 39.5 billion given

  • New smartphones from Apple and Samsung are slated to be released later in 2014
  • Penetration of cheaper smartphones is increasing in emerging markets where the next level of smartphone upgrades will come from

Players in the DRAM market

After Micron’s acquisition of Elpida in Aug 2013, Samsung, Micron, and SK Hynix have become the Big 3 manufacturers of DRAM chips.

Cheaper Smartphone DRAM

Samsung, Micron and SK Hynix control more tha 90% of the DRAM market.

Cheaper Smartphone DRAM

(Source: TrendForce, DRAM exchange, Statista)

Nanya Technology Corporation (2408)

Samsung and SK Hynix from Korea control 75% of the total market share. However, Taiwanese Nanya will also be able to increase its share because of its joint venture with Micron in Inotera memories. Micron amended its agreement in Jan 2013 to buy the entire production of Inotera memories.

Cheaper Smartphone DRAM

(Source: Capital Cube)

Cheaper Smartphone DRAM

Nanya Tech has executed a turnaround in its operations since 2013. This can be seen with an increase of Net Income in 2013 of about 123%. Nanya and Micron hold 29% and 40% of the outstanding shares of Inotera’s memories. Inotera has access to Micron’s technology and expects to commence pilot runs of 20nm-technology at the end of the 2Q2014, on schedule, and launch initial volume production in the end of 2014.

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Given Nanya’s investment in Inotera memories and its successful turnround in 2013, the market expects it to do well. This is reflected in the fact that it is trading at around 13X earnings while the major players like SK Hynix and Micron trade at 9X earnings.

Comparing Net Margin across the top 5 companies, it is seen that SK Hynix, Micron and Nanya technologies have a net margin between 15% – 20% and are the leaders in their group. Samsung even with a large share of the DRAM market has a lower net margin because of lower sales of its smartphones. Micron has been able to turnaround in 2013 mainly because

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